Credit Cards 101

September 02, 2015

The credit card. A piece of magical plastic that allows us to purchase items when we don’t have the cash. The card with the magnetic strip that gives us the power to build (or hurt) our credit scores. And yet somehow this little item seems to cause a lot of uncertainty when it comes to how to best handle them and use them in a way that will help, not harm, you and your credit.

1. Be Picky – It’s easy when you are young to accept a bunch of credit card offers at all of your favorite stores and your bank. Next thing you know, you have twelve cards making it harder to manager and keep track of how much you are spending. Choose only a few cards to sign up with and leave it at that. Always look for no or low annual fees as well as any reward programs. For example, American Express has a great reward program but is not accepted everywhere so a VISA would also be advisable.

2. Pay Entire Balance Monthly – Holding a balance on your credit card from one month to the next almost guarantees excessive interest rates and digging yourself into a hole of debt. Be mindful of when you are using your cards so as not to spend more than you can actually afford. Credit card companies often grant you more credit than you can pay off on a monthly basis.

3. Debit vs. Credit – While using a debit card for all of your purchases may seem like the safer route to travel so as not to go into debt on your credit card, you also are not building up your credit as significantly. Be sure to use your credit cards and pay off the balance to show you are a reliable borrower.

4. Do Not Let Them Sit – Think it’s a good idea to just stop using one of your credit cards to better control your finances? Think again. Not using an open line of credit can harm your credit score. Even if it’s just ten dollars a month, keep that account active and paid off. This also goes back to not opening too many accounts to begin with. Start with a few to maintain closer control of your debt.

5. Do Not Close Cards – It is a common misconception that when gearing up to make a big purchase, such as a home, the less credit lines you have open, the better. So you begin canceling your credit cards. Wrong! Shutting down your credit cards actually greatly hurts your credit score. It is seen as an inability to pay your debt thereby harming your reputation as a trustworthy borrower.

Follow these five steps when handling your credit cards. And always talk to a mortgage professional about your credit and financial history before making any decisions or embarking on your homebuying journey.